Banking Exam Banking Investment and Capital Markets 2 — Questions and Answers
Question 1: What is a Treasury bill (T-bill)?
- A long-term corporate bond issued by Fortune 500 companies
- A short-term US government debt security maturing in one year or less (Correct answer)
- A savings account offered by the US Treasury Department
- A municipal bond issued by state governments
Correct answer: A short-term US government debt security maturing in one year or less
A Treasury bill is a short-term US government obligation with a maturity of one year or less, sold at a discount and redeemed at face value.
Question 2: What does the term 'yield curve' refer to in banking?
- A graph showing a bank's profitability over time
- A chart plotting interest rates of bonds with equal credit quality but different maturity dates (Correct answer)
- A measure of how quickly loans default
- A diagram of a bank's organizational hierarchy
Correct answer: A chart plotting interest rates of bonds with equal credit quality but different maturity dates
The yield curve plots interest rates across different bond maturities for the same issuer (typically US Treasuries), and its shape signals economic conditions.
Question 3: In securities trading, what is a 'short sale'?
- Selling securities at below their fair market value
- Borrowing securities and selling them, hoping to repurchase at a lower price later (Correct answer)
- Selling bonds before their maturity date
- A quick sale executed within the same trading day
Correct answer: Borrowing securities and selling them, hoping to repurchase at a lower price later
A short sale involves borrowing shares and selling them with the intent to repurchase them at a lower price, profiting from a price decline.
Question 4: What is a mutual fund?
- A checking account shared between two or more individuals
- A pooled investment vehicle managed by a professional that invests in a diversified portfolio (Correct answer)
- A savings account insured by the FDIC
- A type of mortgage loan offered to multiple borrowers
Correct answer: A pooled investment vehicle managed by a professional that invests in a diversified portfolio
A mutual fund pools money from many investors and invests it in a diversified portfolio of stocks, bonds, or other securities managed by professional fund managers.
Question 5: What is the difference between the primary market and the secondary market?
- The primary market trades stocks; the secondary market trades bonds
- The primary market is where new securities are issued; the secondary market is where existing securities are traded between investors (Correct answer)
- The primary market is regulated by the Fed; the secondary market by the SEC
- The primary market is for institutional investors only; the secondary market is for retail investors
Correct answer: The primary market is where new securities are issued; the secondary market is where existing securities are traded between investors
In the primary market, issuers sell new securities to raise capital; in the secondary market, investors buy and sell previously issued securities among themselves.
Question 6: What is a derivative financial instrument?
- A government bond derived from tax revenues
- A financial contract whose value is derived from the performance of an underlying asset (Correct answer)
- A bank account that earns interest derived from stock dividends
- A loan product based on a borrower's credit score
Correct answer: A financial contract whose value is derived from the performance of an underlying asset
Derivatives are financial contracts (such as options, futures, and swaps) whose value depends on the price or performance of an underlying asset like stocks, bonds, or commodities.
Banking Exam Banking Investment and Capital Markets 2
What is a Treasury bill (T-bill)?